CoStar Group, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and six months ended June 30, 2011. CoStar provides subscription-based commercial real estate information and analytics in the U.S., U.K. and France; subscriptions generated more than 93% of revenue. Results are reported for U.S. and International segments.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $62.1 million | $55.8 million | $121.7 million | $110.9 million |
| Gross margin | $39.7 million; 63.9% | $35.5 million; 63.5% | $76.8 million; 63.1% | $69.4 million; 62.5% |
| Operating income | $3.9 million | $4.5 million | $11.0 million | $9.6 million |
| Net income | $2.6 million | $3.3 million | $7.2 million | $6.1 million |
| Diluted EPS | $0.12 | $0.16 | $0.33 | $0.30 |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $15.3 million | $20.7 million |
- Q2 revenue rose about 11%, but net income fell about 19%; six-month revenue rose about 10% and net income rose about 17%.
- Six-month segment EBITDA was $17.6 million versus $16.5 million. Q2 EBITDA was $7.1 million versus $7.8 million. These are non-GAAP measures as defined by the company.
- At June 30, cash and cash equivalents were $547.6 million, short-term investments $3.6 million and long-term investments $29.0 million. Current assets were $578.6 million and current liabilities $60.2 million. No conventional borrowings are presented on the quarter-end balance sheet.
- Six-month investing cash flow was positive $73.9 million, primarily reflecting the headquarters building sale; financing cash flow was positive $251.9 million, primarily from the equity offering. Cash increased $341.2 million to $547.6 million.
Material changes versus prior comparable period
- Revenue growth was attributed to subscription-service penetration, cross-selling and higher renewal rates. Trailing twelve-month renewal rate was approximately 92%, compared with 88% a year earlier.
- Q2 operating income and earnings declined despite revenue growth. Management attributed higher general and administrative expense in part to approximately $5.0 million of LoopNet acquisition costs in the quarter; software development and research personnel costs also increased.
- U.S. revenue increased to $57.5 million from $51.5 million in Q2, while U.S. EBITDA declined to $8.3 million from $10.2 million, principally due to LoopNet-related costs. International revenue edged higher; its Q2 EBITDA loss narrowed to $1.1 million from $2.4 million, with the prior-year comparison affected by a Nokia U.K. settlement accrual.
- Cash and total assets rose substantially after the $247.9 million net equity offering and sale of the Washington, D.C. headquarters building. The offering issued 4,312,500 shares at $60 per share.
Outlook, risks and unusual items
- Management expected current services to remain profitable and generate earnings and substantial operating cash flow in 2011, and said available cash plus operating cash flow should fund operations for at least 12 months. The filing does not provide a numerical full-year revenue or earnings forecast.
- CoStar expected to launch CoStarGo on August 15, 2011, with Q3 launch expenses of approximately $3.5–$4.0 million. It also expected Q3 office-consolidation costs of $1.4–$1.7 million and projected annual savings of about $1.0 million.
- The proposed LoopNet acquisition was valued at approximately $860 million equity value and $762 million enterprise value. LoopNet holders would receive $16.50 cash and 0.03702 CoStar shares per share. Closing was expected by year-end, subject to conditions including antitrust clearance; the FTC issued a second request on June 30, extending its review. The deal was not subject to a financing condition.
- Committed acquisition financing included a $415 million term loan and a $50 million revolving facility, of which $37.5 million was committed. If completed, the deal would materially increase indebtedness and may introduce restrictive covenants. Termination fees could be $51.6 million payable by CoStar or $25.8 million payable by LoopNet in specified circumstances.
- The building sale generated $101 million cash consideration, including $15 million designated for improvements. CoStar deferred a $36 million gain and is recognizing it as a reduction in rent expense over the lease term. The leaseback runs to May 2025, with renewal options; minimum payments are projected at $4.8 million for 2011, rising to $6.4 million in 2015, plus $69.2 million from 2016 through lease end.
- CoStar held $32.0 million par value of auction-rate securities that had failed auctions, carried at $29.0 million fair value. The approximately $3.0 million unrealized loss was treated as temporary and recorded in accumulated other comprehensive loss; the securities may not be readily liquidated.
- Three shareholder lawsuits challenged the LoopNet merger. A settlement memorandum contemplated an approximately $100,000 loss, subject to merger completion and court approval. A former-employee wage-and-hour case was settled; CoStar paid approximately $500,000 in April 2011.
- Management cited economic and commercial real estate uncertainty, customer cancellations and payment risk, foreign-exchange movements, integration and regulatory risks related to LoopNet, and potential impairment or liquidity risk in investments. The company does not hedge foreign-currency exposure. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the LoopNet acquisition received antitrust clearance, closed on expected terms and timing, and what financing, integration costs, synergies and dilution resulted.
- Subsequent trends in subscription renewal rates, customer cancellations, revenue growth and margins, particularly whether acquisition and product-launch spending pressure earnings.
- Actual CoStarGo launch timing, adoption and costs, and whether the planned office consolidation achieved projected savings.
- Liquidity and fair value recoverability of the failed-auction securities, and any additional impairment or other comprehensive loss.
- Cash-flow generation excluding one-time proceeds from the building sale and equity issuance, and the impact of long-term lease payments and any acquisition debt.